Chargeback

Chargebacks were originally created as a consumer protection mechanism following the Fair Credit Billing Act of 1974. When cardholders dispute a transaction with their issuing bank, the bank investigates the claim and may reverse the transaction by debiting the merchant's account and crediting the cardholder, effectively forcing a refund without merchant consent. Common dispute reasons include unauthorized transactions (fraud), goods or services not received, product not as described, duplicate processing, incorrect transaction amount, and canceled recurring transactions.

The chargeback process follows specific timeframes and procedures established by card networks. After receiving a dispute, the issuing bank files a chargeback with the card network, which debits the merchant's acquiring bank. The merchant is notified and may submit evidence to dispute the chargeback (called representment), such as proof of delivery, service records, or signed receipts. The issuing bank reviews the merchant's evidence and makes a final decision, which may be further appealed through pre-arbitration or formal arbitration.

Card networks monitor merchant chargeback ratios (total chargebacks divided by total transactions). Merchants exceeding a 1% chargeback ratio may face penalties including increased processing fees, mandatory chargeback monitoring programs, and potential termination of merchant accounts. Each chargeback typically incurs a fee ranging from $15 to $100, assessed by the acquiring bank or processor, regardless of whether the merchant successfully disputes it.

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